Group 1 - BWM inc. contribution format income statement for the most the month of January is posted below: Sales 40,000 units $800,000 Variable expenses 560,000 Contribution Margin 240,000 Fixed Expenses 192,000 Net operating income $48,000 BWM operates in an industry thats quite sensitive to cyclical movements in the economy. Profits vary considerably from year to year according to the general economic conditions. The company has a large amount of unused capacity and is contemplating of ways of improving revenues.

Many of the board members of the company are heavily involved in the companys corporate social responsibility in the community that they operate in. Information about the new machine: Environmentally friendly The new machine is so efficient, the company would not need to hire any additional employees for the next 5 years. With the old machine, the company was scheduled to hire 25 new employees in the community. The old machine is causing a lot of stress to the employees as there had been so many downtimes due to repairs and maintenance

Write a memo (max of 2,000 words) to the President of the company by answering the required. The President of the company does not have an accounting background.

Required:

1. New equipment has come on the market that would allow the company to automate a portion of its operations. Variable expenses would be reduced by $6/unit. However, fixed expenses would increase to total of $432,000 each month. Prepare 2 contribution format income statements; showing present operations and one showing how operations would appear if the new equipment were purchased. Show an Amount column, a Percent column on each statement. Please do not show percentages for the fixed expenses.

2. Refer to the IS in requirement (1) above. For both present operations and proposed new operations, compute (a) degree of operating leverage, (b) the break-even point in dollars, and (c) the margin of safety in both dollar and percentage terms.

3. Refer to requirement #1 above, as a controller, what factor would be paramount in your mind in deciding whether to purchase the new equipment?

4. Refer to the original date. Rather than purchase new equipment, the marketing manager argues that the companys marketing strategy should be changed. Hire new employees with lower wages and give current employees with high salaries a retirement package. Then the company invests heavily in advertising. The marketing manager claims that this new approach would increase unit sales by 50% without any change in selling price; the companys new monthly fixed expenses would be $240k and its net operating income would increased by 25%. Compute the break-even in dollars sales for the company under the new marketing strategy. Do you agree with the managers proposal explain your answer?

5. What would be the expected percentage of increase in net income? As the accountant use the degree of operating leverage to compute your answer. *when you write your memo; make sure you include both qualitative and quantitative considerations